World’s Most Manipulated Market Set to Fall

Crude prices peaked at US$55.21 per barrel in January, and have struggled since. The downtrend has started. Though the price remains over $50 today.

The Organization of the Petroleum Exporting Countries (OPEC) has artificially pumped prices higher…again. It’s a never-ending fairy tale. After months of trading above US$50 per barrel, oil prices nosedived into the $43-a-barrel region this month. With dreams of refurbishing their holiday palaces in jeopardy, OPEC members talked up crude prices.

To understand why, let’s wind back the clock…

Same story, different day

Last November, OPEC said it would ‘freeze’ crude supplies at 1.2 million barrels of oil per day (MMbpd) into June. The ‘cut’ was a manipulative tactic, aimed at artificially driving up crude prices. OPEC will still produce more crude than it did in 2015 — when crude prices were in freefall.

The manipulation tactic didn’t worked out as planned. US shale producers keep pumping more crude oil. And that has weighed on prices…

Goldman Sachs — a global investment bank — just reported the number of active US oil rigs jumped by a staggering 128% since May last year. During that time, US oil production has climbed by 10%, to 9.3 MMbpd. That’s close to the 9.7 MMbpd record hit in April 2015 — the highest since May 1971.

US shale operators aren’t the only ones taking advantage of OPEC’s manipulation. Gulf of Mexico crude production is also at an all-time high.

Adding it up, there are no surprises as to why crude prices crashed into early May. The world is swimming in oil. Saudi Arabia — the world’s largest oil producer — knows it. The country is worried and has started to panic. That’s why it started talking up crude prices…again.

Hindustan Times reported on Tuesday:

‘Prices have risen on expectations that a pledge by the Organization of the Petroleum Exporting Countries (OPEC) and other producers, including Russia, to cut supplies by 1.8 million barrels per day (bpd) will be extended by six to nine months, instead of covering only the first half of this year.

‘“The decision (to extend cuts) seems to be almost a done deal,” said Bjarne Schieldrop, chief commodities analyst at SEB Markets. “There seems to be a very high harmony in the group.”

‘The option of deepening the cuts was also being discussed ahead of a meeting of OPEC and other producers in Vienna on May 25, sources said.

‘“Oil soared…as rumours swirled that OPEC…was considering recommending the double whammy of a production cut extension and deeper cuts ahead of this Thursday’s meeting,” said Jeffrey Halley, analyst at futures brokerage OANDA in Singapore.

‘Deeper cuts are required to balance the market, according to some analysts who point to a slight rise in OPEC exports this year.’

Deeper cuts are unlikely to transpire at tomorrow’s meeting. With the oil price ‘safely’ back above US$50 per barrel, Khalid Al-Falih told a news conference yesterday (reported by Reuters):

‘We believe that continuation with the same level of cuts, plus eventually adding one or two small producers, if they wish to join, will be more than adequate to bring the five-year balance to where they need to be by the end of the first quarter 2018.’

The Reuters article went on to discuss the nine-month minimum extension. Iraq, OPEC’s second-largest producer, said it will support extending the output cut.

The chart shows the country pumped out 80,000 barrels per day more than permitted by the original agreement last quarter. If the deal gets extended to 2018, despite the country’s promises, there’s Buckley’s chance it will follow the rules. Iraq’s key southern fields are expanding, and three years of fighting Islamic State has left the country drowning in debt.

Open the floodgates

Meanwhile, while the crude oil circus keeps making headlines, US shale producers will continue pumping more crude. That’s going to drown the world with crude, sinking oil prices in the months ahead.

And if that wasn’t bad enough news for OPEC and oil investors, along comes Donald Trump. According to Bloomberg yesterday:

‘The White House plan to trim the national debt includes selling off half of the nation’s emergency oil stockpile and the entire backup gasoline supply, part of a broad series of changes proposed by President Donald Trump to the federal government’s role in energy markets.

‘The Strategic Petroleum Reserve currently holds 687.7 million barrels of oil in salt caverns and tanks at designated locations in Texas and Louisiana, which allow for quick distribution when natural disasters or unplanned incidents occur. The White House budget plan calls for selling 270 million barrels of reserve oil over the next decade beyond already planned sales, and it proposes closing two of the four Gulf Coast reserve sites. After all those sales, the reserve would be about 260 million barrels, it said.’

If you wondered whether the US was going broke, this proves — without a doubt — that the answer is ‘yes’. With its ample oil reserves, the US government plans to repair the national budget. That’s a smart move…not that politicians realise it yet. In the next 10–15 years, electric cars and alternative energy will take off, which is likely to drive crude demand to fresh lows. Nevertheless, with more supply to hit the market in the years ahead, that’s likely to push crude prices lower.

The blue downtrend channel previously defined the market…until this month. You can see that the angle of the channel has become steeper, moving to the pink channel (discussed below). That indicates that the crude market is moving from bullish to bearish.

The top pink resistance line marks the February and April highs. The lower pink line is a parallel drawn from the March low. Interestingly, the pink channel held the market’s bounce this month from the low. We didn’t see a closing below it. That needs to happen to confirm the downtrend.

The black line has defined the uptrend since August 2016. We need to see a consecutive weekly closing below that line. Crude closed below it during the first week of this month; however, prices were quickly manipulated higher by OPEC.

The bottom line: Despite the recent bounce, crude isn’t as strong as it appears. A weekly closing below $45 should see new lows.

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